Global regulators moved to rein in risk at the world's biggestmoney managers led by BlackRock Inc., calling for new curbs ontrading activities to protect against the potential that losses atinvestment funds could threaten the broader financial system.

The Financial Stability Board (FSB), whose members include theU.S. Federal Reserve and the Bank of England, said on Wednesdaythat exchange-traded funds (ETFs), mutual funds, and other fundsdeserve extra oversight to ensure they can sell assets to meetinvestors' demands to pull out their money during volatile markets.While there is scant history of funds spreading risk throughout thesystem, the growth of the $76 trillion industry and funds' moveinto more complex assets have drawn regulators' attention, the FSBsaid.

The FSB said it may still move to designate certainasset-management companies as systemically important and in need ofstricter supervision. For now, authorities are planning to requirefunds to provide greater disclosure to clients about risks and tostrengthen internal standards for managing investments in stressedmarkets. Regulators also plan to beef up rules for overseeingfunds' leverage and use of derivatives and to reviewasset-managers' lending of securities to other parts of themarket.

“Given its increased importance, a resilient asset managementsector is vital to finance strong, sustainable, and balancedgrowth,” BOE Governor Mark Carney, who chairs the FSB, said in astatement. Daniel Tarullo, a governor of the Federal Reserve, saidthat the recommendations “are designed to enhance the resilience ofasset managers and funds to future stress in financialmarkets.”

The draft policy recommendations are the latest step byregulators around the world to curb risks beyond the banking andinsurance industries, which received most of authorities' scrutinyin the aftermath of the 2008 financial crisis. As scores ofpost-crisis rules have taken effect, banks have stepped back fromcertain markets, such as corporate bond-trading, while assetmanagers have taken on a greater role.

Assets under management rose to $76 trillion in 2014 from $50trillion in 2004 and have grown since the crisis, according to theFSB.

The board said in its report that it will seek comments on theproposals until Sept. 21 and intends to complete therecommendations by the end of the year. It will then turn itsattention to considering whether an asset-management companyitself, or possibly a sovereign-wealth fund, rather than theiractivities, can be a source of systemic risk.

“We continue to believe that the FSB's process should be drivenby historical experience and empirical data, rather than byhypothesis and conjecture,” Paul Schott Stevens, chief executiveofficer of the Investment Company Institute, a lobbying group formutual and exchange-traded funds, said in response to the proposal.“In particular, we emphasize again that there is no empirical basisfor the FSB to pursue the designation of regulated funds or theirmanagers as global systemically important financialinstitutions.”

Strident Opposition

The International Organization of Securities Commissions onWednesday came out with recommendations on improving datacollection to help regulators monitor and tackle risks.

Regulators and the asset-management industry have clashedrepeatedly in the past few years, with firms such as BlackRock andFidelity Investments arguing that authorities misunderstand thenature of the asset-management business and have inappropriatelycompared them to to banks. Banks designated as systemicallyimportant face higher capital and other requirements to help themwithstand losses in a potential downturn.

The FSB and IOSCO, a group of market regulators, had earlierconsidered whether to assess investment funds with more than $100billion in assets to determine whether they're too big to fail.That idea ran into strident opposition from the fund industry, withBlackRock, Fidelity Investments, Vanguard Group Inc. and PacificInvestment Management Co., among others, meeting with regulatorsand lawmakers and writing letters and reports in a lobbying effortto get them to reconsider.

BlackRock, the world's largest money manager, said in a May 2015letter to the FSB that asset managers “are not the source ofsystemic risk,” and that “asset managers are fundamentallydifferent from banks and other financial institutions.”

The industry argued that instead of a list of too-big-to-failinvestment firms, regulators should consider ways of bolsteringoversight of specific products, practices, or activities. The FSBand IOSCO agreed last year, and decided to wait to finalize themethod for assessing systemically important financial firms thataren't banks or insurers.

“The good news is we've been able to shift this discussion fromlooking at asset managers as systemically important to looking atthe activities that asset managers engage in,” Paul Andrews,secretary general of IOSCO, said this month.

The FSB said in its 43-page consultation that although therehaven't been recent problems, funds may “amplify market stress” byrushing to sell assets to meet unanticipated or large demands fromclients to redeem their investments. In periods of stress, theremight be a so-called first-mover advantage for investors to rush toredeem their funds ahead of others, which could then lead to afire-sale of assets and spread panic in markets.

In the U.S., the Financial Stability Oversight Council, a panelled by the Treasury secretary, said in April that there may befinancial stability concerns arising from funds that invest inassets that are difficult to sell in volatile or stressed markets.Meanwhile, the U.S. Securities and Exchange Commission conducted areview of the industry following the collapse in late 2015 of afund overseen by Third Avenue Capital Management LLC that focusedon high-yield and distressed debt.

Illiquid Assets

The SEC has also proposed rules requiring funds to have morecash and assets to sell quickly, while the FSB said on Wednesdaythat more disclosure to investors about funds' liquidity andexplicit or enforceable limits on illiquid assets might benecessary.

The investment industry has rejected concerns about potentialfire-sales. The Investment Company Institute has said that largeredemptions at individual high-yield bond funds haven't underminedthe stability of the financial system and that funds have insteadadded liquidity during periods of market turmoil.

The largest asset-management companies are also likely to opposean FSB recommendation for greater scrutiny of their lending ofsecurities to other traders. Financial institutions often pay a feeand provide collateral to a fund company in order to borrowsecurities for their own trading purposes. Mutual and other retailinvestment funds accounted for 44 percent of the 14 trillion euros($15.8 trillion) in securities made available for lending,according to 2015 data cited by the FSB.

Large asset managers sometimes also provide insurance to theirown investors through the form of an indemnification against anypossible losses from the arrangements if the borrower doesn'treturn the securities. As new regulations apply to banks, the FSBsaid asset-managers may play a larger role in the lending marketwhich “could potentially result in a concentration of systemicrisks outside the banking sector.”

The FSB said regulators need better data to oversee the lendingand should look to also verify or confirm that asset-managers haveresources to cover the losses. The industry has previously saidregulators' worries are overstated.

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